If you serve in the military or are a veteran and want to buy a house, you probably qualify for a loan from the Department of Veterans Affairs. A VA loan requires little money down, provides a low interest rate and offers forgiving terms if you’ve had a foreclosure or bankruptcy in the past. It might just be your best chance of becoming a homeowner.
Because of the unique process and paperwork required to obtain a VA loan, you’ll want the help of a mortgage lender and real estate agent with experience serving military clients. Here’s a closer look at VA loans and how to know whether you qualify.
What is a VA loan?
In 1944, before the end of World War II, Congress passed the Servicemen’s Readjustment Act. The act offered a wide variety of benefits to eligible veterans, and the home-loan program was among its most important provisions.
Today, the Department of Veterans Affairs oversees the VA home-loan benefit program. Like a borrower getting a conventional home mortgage, a VA loan borrower must go through a private lender, specifically one approved by the VA. Unlike a conventional home loan, however, a VA loan often does not require a down payment. Instead, you’ll need to pay a modest funding fee. These loans are somewhat easier to qualify for than conventional mortgages, and they’re partially guaranteed by the VA as long as its guidelines are met.
Who is eligible?
Fortunately, nearly all members of the military as well as veterans, reservists and National Guard members are eligible for a VA loan. Spouses of service members who died during active duty, or as a result of a disability received from service, also are eligible.
There are eligibility limitations based on the type and length of your military service, as well as whether it was during a period of war or peace.
Potential borrowers must obtain a Certificate of Eligibility (COE), which can be submitted online, before applying for a VA loan. The VA doesn’t require a minimum credit score, but lenders generally have their own requirements and prefer a credit score of 620 or higher. There might be wiggle room on credit scores if you pay a higher interest rate, so be sure you ask your lender to spell out the terms.
Borrowers must show sufficient income to repay the loan and shouldn’t have excessive debt, but the guidelines for VA loans usually are more accommodating than other loan types. Finally, the home must be for a primary residence; VA loans cannot be used to buy vacation or investment homes.
» MORE: Use our VA loan calculator to determine your monthly payment
What does a VA loan cost?
If you qualify for a VA loan, you’ll save a sizable amount of money whether you’re buying your first or second home. For example, those using the VA loan program for the second time, without a down payment required, would pay a funding fee of 3.3% of the total loan amount. This is about 0.2% less than the down payment required for a Federal Housing Administration loan (for a first-time buyer), not including the fees for mortgage insurance. Let’s say you’re a first-time buyer and you can afford a down payment of 10%. Your VA loan funding fee could be reduced to 1.25% of the loan amount.
A VA loan also doesn’t require mortgage insurance, unlike FHA loans and conventional loans with less than a 20% down payment. The result is significant savings for VA borrowers. (In contrast, a borrower who takes out a $250,000 FHA loan pays about $250 a month just for mortgage insurance.)
Regulations limit the fees that military borrowers have to pay to obtain a loan, which can save thousands of dollars at closing.
The funding fee is waived for those receiving VA compensation for disabilities acquired during service, and also for surviving spouses in many cases.
How else do VA loans help veterans?
The VA loan program is very forgiving. It allows you to use your home-loan benefits a year or two after bankruptcy or foreclosure. Another great perk is the support offered to struggling borrowers. If you can’t make payments on your mortgage, the VA will negotiate with the lender on your behalf. So if you wind up needing a little extra help and flexibility, this program is solid and reliable.
Another perk of the program is the VA’s cash-out refinance loan. This is for homeowners who want to take cash out of their home’s equity (the value of the house not including what is owed) in order to put the money toward other necessities, such as home improvements or paying off other debts. This loan also allows refinancing of a non-VA loan into a VA loan, allowing your options to expand with your lifestyle. And, best of all, loans are guaranteed by the VA for as much as 100% of your home’s value.
One of the most popular VA refinance programs is the interest rate reduction refinance loan. Known as IRRRL (pronounced like “Earl”), it allows for qualified borrowers get a better interest rate on a previous VA mortgage. In fact, nearly one-third of all VA loans were IRRRL loans in fiscal year 2016.
Benefits of a VA loan
As you can see, there is a lot to like about VA loans. In addition to not requiring a down payment — and of course, that’s a huge benefit — VA loans come with other advantages:
- They are easier to qualify for
- Your credit score doesn’t matter as much as your ability to repay the loan
- And mortgage rates are generally lower than conventional loan rates
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This post was updated. It was originally published Jan. 14, 2013.
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